Manufacturing index shrinks less than expected

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A report on manufacturing activity shows the sector contracted less than expected in June, posting its best showing since last August and another sign that a recovery may be near.

The Institute for Supply Management, a trade group of purchasing executives, said its manufacturing index registered 44.8 in June, up from 42.8 in May. Analysts polled by Thomson Reuters had expected a reading of 44.5.

“A slow recovery for manufacturing is forming,” said Norbert Ore, chair of the ISM’s manufacturing business survey committee.

A reading below 50 indicates contraction. June’s reading marks the 17th straight month of deterioration in manufacturing.

Still, there is an encouraging pattern in recent ISM manufacturing reports. This is the second straight month that the index has been above 41.2 after seven consecutive declines. The ISM says a reading above that level is consistent with expansion in the overall economy ? even though the manufacturing sector itself is still shrinking.

The ISM survey hasn’t noted growth in manufacturing since January 2008.

The manufacturing index includes new orders, production, employment, inventories, prices, and export and import orders. It is based on a survey of the Tempe, Ariz.-based ISM’s members.

Customers’ inventories shrank again in June. Low inventories mean that businesses will need to restock from manufacturers, prompting new orders and production. The production index grew to 52.5 in June from 46 in May ? the first growth reading after nine months of decline.

But new orders shrank to 49.2 after growing in May for the first time in 17 months. Growth in new orders is a perquisite for ramping up production and hiring.

Copyright 2009 The Associated Press.